Stock market direction confounding analysts

“If only Henny Youngman was still around to comment on this market”

Ever been in one of those situations where you’re at a meeting listening to a monolinguist drone on and on and you’re getting to that point where you want to jump to your feet and yell, "Good grief. Get to the point!" That’s a little how we feel about this stock market. Not only are the major indexes about where they were seven months ago, but the lack of convincing upside action getting back to the April highs has been, well, less than convincing. In fact, to morph the old Henny Youngman line, "Take this market. Somebody! Please! Take this market!"

Like it or not, however, this is the only market we have just now. The bellwether indexes as measured by the S and P 500 Index and the Dow Jones Industrial Average are enmeshed in what looks like at least a short-term pullback after hitting their best levels since the March 2009 lows on November 5. Over the past two weeks both indexes sold lower by just over 2% through last Friday’s close. And the extent of weakness still looks like it could turn out to be a mere lull in the larger Intermediate Cycle advance that began after the July lows.

But as we have mentioned ad nauseum for months, the lack of upside participation in this market has been glaringly evident. Not only has total market volume been noticeably absent, but indicators like out Most Actives Advance/Decline Line (MAAD) continue to behave schizophrenically. While Weekly MAAD statistics perked along during the rally to confirm strength above the late April highs along with the major indexes on November 5, the more sensitive Daily MAAD peaked back on October 12 while failing to get anywhere near its late April highs since then. In fact, Daily MAAD was last at levels not seen in over two months. The only optimistic tone to the smaller cycle MAAD readings is that the Daily Ratio has dipped into deeply "oversold" territory to suggest there could be some rebounding, at least to the extent "oversold" is really "oversold."

On another front, our Call/Put Dollar Value Flow Line (CPFL) has paid little attention to the so-called Smart Money of MAAD fame and has continued to hold toward its new highs reached back on November 11. That action continues to hint that options players remain somewhat optimistic about this market. And in fact, there is no denying the net upward bias of price action since the July lows when the S&P dipped as low as 1010.91 with the Dow 30 teasing 9614.32.

But like serious travelers on any trip, those willing to commit funds to the journey want to know that what they are paying for is the "real thing" and not just a facsimile that could evaporate at any time. They want to know that what they are experiencing is more than a mirage or an hallucination with elusive rewards at the end. And for the life of us, this market is beginning to have many of the earmarks of a trip that is destined to turn out badly. Why? Because we can recall no instances in stock market history where rallies with poor participation did not ultimately succumb to concerted selling pressure. In fact, given the internal "power" of this rally, we are beginning to wonder if a mouse squeak might not turn anemic uptrend into a downside rout.

Nonetheless, like a captive listener ensconced in the middle of a row with other captive listeners, we must continue to tolerate the lack of excitement exemplified by low volume, low volatility, and the snoring from the back rows until such time as the longer-term trends begin to assert themselves. And as we mentioned in last week’s Market Summary when we discussed the work of J.M. Hurst and his half-span moving averages that a currently trending negatively, we suspect this market doesn’t have a great deal of time left to continue dawdling. In short, it either has to kick to the upside on increasing volume, or not. It’s the "not" part that we remain concerned about.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on both the Daily and Weekly Cycles faded last week. Daily data fell to its lowest levels since mid-September after failing to confirm positive action by the larger weekly MAAD series by rallying to a new high and above the late April peak on November 5. There is now a marked divergence between Daily and Weekly data.

While it’s possible that the Daily series will move higher to new highs if the market is able to resume its Intermediate-term advance sometime soon, we must caution that MAAD on that smaller cycle has had a tendency to lead the market. When added to the fact that the indicator from a larger point-of-view has significantly failed to participate on the upside since the March 2009 lows, it wouldn’t take much larger cycle selling to drive the indicator on both cycles downward and below the March 2009 plot lows. Such movement would not bode well for the broad market on the Major Cycle.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL data faded on both the Daily and Weekly Cycles last week, but remains well above the late April highs surmounted back on October 19. CPFL action continues to suggest that options players, on balance, remain relatively optimistic about the stock market while the indicator continues to suggest that new highs in the broad market could follow.

We should note, however, that options players, given the nature of the "fragile" longer-term nature of the investments they have chosen, tend not to overstay their welcome when they are convinced they could be on the wrong side of a trade. This market should be no exception to that rule.

Click charts to enlarge

Conclusion

Despite some short-term term selling pressures, the major indexes as measured by the S and P 500 and the Dow Jones Industrial Average nonetheless perked a bit higher late last week to boost the two by fractions. While it’s possible that the smaller cycle has seen its worst bids within the context of a larger Intermediate-term positive, we would have to see strength back above those November 5 highs at 1227.08—S&P 500 and 11451.53—Dow 30 to suggest a confirmed re-assertion of the advance that began after the early July Intermediate-term lows.

While a resumption of buying would certainly give heart to the bullish camp, we continue to note the lack of broad market participation in terms of volume depth and the fact that prices of the major indexes have apparently continued to find going on the upside difficult, given their net performance over the past year. In addition, at some point the Major Cycle will "loose patience" and could take a large downside bite out of this market if more decisive action from the bullish camp doesn’t develop, and soon.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

4-30-10

2

18

4-30-10

139488

363448

5-7-10

3

17

5-7-10

929902

2329559

5-14-10

14

6

5-14-10

263151

730414

5-21-10

5

15

5-21-10

1172844

1654053

5-28-10

10

10

5-28-10

477797

584893

6-4-10

5

15

6-4-10

265339

515370

6-11-10

12

8

6-11-10

263791

544655

6-18-10

11

9

6-18-10

357965

119532

6-25-10

5

15

6-25-10

91068

599114

7-2-10

4

16

7-2-10

1034509

771231

7-9-10

18

2

7-9-10

635690

110808

7-16-10

9

11

7-16-10

171633

445073

7-23-10

16

4

7-23-10

322870

174663

7-30-10

15

5

7-30-10

199970

217368

8-6-10

15

5

8-6-10

271701

115037

8-13-10

3

16

8-13-10

132060

409972

8-20-10

8

12

8-20-10

176830

488032

8-27-10

6

14

8-27-10

207995

222943

9-3-10

17

3

9-3-10

488323

102016

9-10-10

12

7

9-10-10

287697

82863

9-17-10

15

5

9-17-10

289703

112410

9-24-10

12

8

9-24-10

209124

100570

10-1-10

9

11

10-1-10

145020

121894

10-8-10

14

6

10-8-10

394156

98483

10-15-10

10

10

10-15-10

476975

115923

10-22-10

11

9

10-22-10

2575024

116468

10-29-10

10

10

10-29-10

376133

120924

11-5-10

13

7

11-5-10

547056

71345

11-12-10

5

15

11-12-10

203906

305387

11-19-10

7

13

11-19-10

241420

143672

*Note: All data is for week ending on Friday even though ending date may be a holiday.
Unchanged issues in MAAD calculations are not counted.